22 May 2018 1QFY18 Results Review Petronas Chemicals Group Berhad Strong PUR and sales volume growth INVESTMENT HIGHLIGHTS Petronas Chemicals Group Bhd s (PChem) 1QFY18 earnings expanded by +6%qoq to RM1.1b 1QFY18 PUR at 100% due to good feedstock and asset reliability Product volume growth of +11%yoy Average product prices increased on strengthening global crude oil prices Downgrade to NEUTRAL (upside bias) with revised TP of RM8.90 per share 100% PUR from better plant performance. PChems 1QFY18 earnings increased by +6%qoq to RM1.1b. The commendable profit is premised on strong revenue growth of +5.5%yoy and +4.5%qoq to RM4.95b highest ever achieved so far. The upbeat sales figures are a result of: (i) PUR of 100% and; (ii) higher average selling prices (ASP). The growth in revenue was however undeterred by weaker USD. Product volume grew by +11%yoy to 2,798MT for 1QFY18 compared with 2,513MT in 1QFY17. Annual production volume is forecasted to be above 10,000MT per annum for FY18. Earnings within estimates. 3MFY18 normalised earnings (excluding loss of partial divestment of subsidiary and forex losses) met our and consensus expectations at 25% and 26% of FY18 full year earnings estimates respectively. Overall PATAMI margin sustained at a healthy 22% for the quarter. Olefins & derivatives. FY17 segment revenue and profit increased by +6.1%qoq and by +12.9%qoq respectively. Segment PUR was at 100% while average product prices increased by +10% in-line with strong crude oil prices. Ethylene production for the quarter was at 263kMT (+2.7%yoy). Fertilisers & Methanol. Both segment revenue and profit surged by +22.0%yoy and by +25.1%yoy due to (i) PUR 99.5%; (ii) higher average product prices from strong crude oil prices and; (iii) strong sales volume. The surge in revenue and profit is attributable to PC Fertiliser Sabah (SAMUR). Urea production was at 643kMT (+78.6%yoy) while methanol production was at 540kMT (+6.9%yoy). Downgrade to NEUTRAL Revised Target Price (TP): RM8.90 (previously RM8.72) RETURN STATS Price (21 May 2018) Target Price RM8.70 RM8.90 Expected Share Price Return +2.3% Expected Dividend Yield +3.1% Expected Total Return +5.4% STOCK INFO KLCI 1,853.58 Bursa / Bloomberg Board / Sector Syariah Compliant 5183 / PCHEM MK Main / Trading Services Yes Issued shares (mil) 8,000.0 Market cap. (RM m) 69,600.0 Price over NA 2.1x 52-wk price Range RM6.61 RM8.70 Beta (against KLCI) 0.80 3-mth Avg Daily Vol 7.1m 3-mth Avg Daily Value Major Shareholders (%) RM58.9m Petroliam Nasional Berhad 64.35 Employees Provident Fund 7.17 Kumpulan Wang Persaraan Diperbadankan 3.06 is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures
2 Commendable PUR despite turnaround activities. Management guided that FY18 will be another year with heavy turnaround activities. Despite this, the average PUR for the group is expected to remain above 90%. The bulk of the heavy turnaround will happen in 3QFY18 where PUR is expected to be below 90% while PUR for 1HFY18 is expected to remain high (PUR for 2QFY18 is currently at 94%). For 3QFY18, TA will be conducted on its cracker, fertiliser and methanol facilities. Impact on earnings. No changes to earnings estimates. Remain sanguine on company. Moving forward into the year, the group s overall PUR will be under stress owing to heavy turnaround activities. Nonetheless, management still expects total product volume output to be above 10kMT, comparable with that of FY17. In addition, management also expects profits to be on par with FY17 premised on strong demand, strong asset reliability albeit softening product prices. Expected turnaround activities and forecasted in FY18 FY18 Activities Expected PUR 1 st Half - PC MTBE High 90s% 2 nd Half - PC Methanol - ASEAN Bintulu Fertiliser <90% Source: MIDFR, Company Recommendation. Year-to-date, Pchem s share price has appreciated by +13%, while valuations are currently at a two-year high. With heavy TA expected this year and earnings expected to remain relatively flat year-over-year, we are downgrading our recommendation to NEUTRAL with an upside bias. We roll forward our valuation base year to FY19 with a revised target price of RM8.90 per share. Our target price is derived from PER19 of 16x pegged to EPS18 of 55.6sen. Product price outlook for 2QFY18 No. Product Outlook 1 Ethylene ASP expected to remain stable owing to firming crude prices coupled with TA in NEA and ME. Softer demand is seen in SEA and FEA. 2 Polymers ASP expected to also remain stable due to ample supply in SEA and stable demand in China and SEA. 3 MEG ASP expected to continue to be stable attributable to maintenance shutdown in NEA and ME. High inventory in China ports seen while anticipated restocking from polymer manufacturers. 4 Aromatics ASP also expected to be stable due to ample supply in SEA and ME. Stable demand from downstream seen. 5 Urea ASP expected to soften due to the end of purchasing season in US and Europe. Thailand is also recording high inventory levels. 6 Ammonia ASP expected to also soften due to new capacity in steam in NEA. Low demand from downstream also expected due to TA. 7 Methanol ASP expected to be stable form stable supply with high OR. Stable demand from downstream seen Source: MIDFR, Company
3 INVESTMENT STATISTICS FYE Dec FY15 FY16 FY17 FY18F FY19F Revenue (RM m) 13,536 13,860 17,407 17,442 17,810 EBIT (RM m) 3,757 4,046 5,240 5,306 5,418 Pretax Profit (RM m) 3,833 4,110 5,236 5,564 5,684 Net Profit (RM m) 2,782 2,932 4,177 4,356 4,450 EPS (sen) 35 37 52 54.5 55.6 EPS (%) 13 6 41 5 2 PER (x) 24.9 23.5 16.7 16.0 15.6 Net Dividend (sen) 18 19 27 27 27 Net Dividend (%) 2.1 2.2 3.1 3.1 3.1 Source: MIDFR DAILY PRICE CHART Aaron Tan Wei Min aaron.tan@midf.com.my 03-2772 1650
4 1QFY18 RESULTS SUMMARY FYE Dec (RM m) Quarterly Results 1Q17 4Q17 1Q18 QoQ (%) YoY (%) Revenue 4695 4740 4951 4.5 5.5 COGS -2742-3083 -3100 0.6 13.1 Gross Profit 1953 1657 1851 11.7-5.2 Selling & Dist Expenses -184-201 -204 1.5 10.9 Admin Expenses -177-163 -208 27.6 17.5 Other Expenses -12 3-179 -6066.7 1391.7 Other Income 59 74 63-14.9 6.8 Operating Profit 1639 1370 1323-3.4-19.3 Financing Costs -6-5 -4-20 -33.3 Associates 3-43 17-139.5 466.7 PBT 1636 1322 1336 1.1-18.3 Tax -255-273 -229-16.1-10.2 PATAMI 1295 1005 1065 6-17.8 Segments: Revenue - Olefins & Derivatives 3218 2969 3151 6.1-2.1 - Fertilisers & Methanol 1465 1813 1787-1.4 22 - Others 12 na 13 nm 8.3 Profit - Olefins & Derivatives 933 637 719 12.9-22.9 - Fertilisers & Methanol 451 391 564 44.2 25.1 - Others -3 21-176 -938.1 5766.7 Total 1381 1049 1107 5.5-19.8 Source: MIDFR
5 is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL SELL TRADING SELL Total return is expected to be >10% over the next 12 months. Stock price is expected to rise by >10% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -10% and +10% over the next 12 months. Total return is expected to be <-10% over the next 12 months. Stock price is expected to fall by >10% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months.